1. How Smart, Connected Products are Transforming Competition: Executive Summary
Eric Snow
SVP, Corporate Communications
April 9, 2015

2. Culmination of 18 Month Primary Research Initiative
Sunday, April 16, 2017
Culmination of 18 Month Primary Research Initiative
Smart, connected products will give rise to the next era of IT-driven productivity growth at a time when the impact of earlier waves of IT has largely played itself out.
This phenomenon is commonly referred to as the Internet of Things.
And according to global consulting firm McKinsey as much as $6.2 trillion in global economic value will be generated by this trend over the next ten year. As a point of reference, that’s about ten times as much economic value as the firm expects will be created by 3D printing.
According to Gartner the verticals that are leading the adoption and accrual of economic value-add (which represents the aggregate benefits that businesses derive through the sale and usage of IoT technology) are manufacturing (15 percent), healthcare (15 percent) and insurance (11 percent).
According to Cisco we’ll see as many as 50 billion of these things connected to the Internet by the end of this decade and as John Chambers described all of these connected devices and the volumes of data they generate will require a huge volume of new business applications that can deliver the right insights to the right people at the right time.
Prof. Michael Porter
Harvard Business School
Jim Heppelmann
President and CEO, PTC
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3. The Third Wave of IT Driven Competition
1800s s s s Beyond
Mechanical Products
& Physical Processes
Value Chain Automation
Value Chain Dispersion and Integration
Smart, Connected Products
Products are mechanical and value chain activities are performed manually using analog information through paper processes and verbal communications
IT used to automate information collection and processing in activities across the value chain
The Internet enables coordination and integration across the value-chain, with customers and business partners, and across geography
IT is embedded in products themselves, transforming value creation through products while triggering a new wave of shifts in the value chain, product design, procurement, marketing, and service while creating the need for new activities
There have been two previous waves of IT evolution, and today smart, connected products in the internet of things establish the third wave
Before the 1960s the products were solely mechanical, electrical and material components and activities across the value chain were performed manually using analog information through paper processes and verbal communications
The first wave of IT evolution came in the 1960s and 70s as computers and software within the enterprises automated information collection and processes. For example, order processing and billing software and specific to PTC and its customers CAD tools like Pro-Engineer transformed activities across the value chain.
The second wave of IT evolution came in the 1980s and 90s as the Internet enabled coordination and integration across the value chain, with outside partners, suppliers, and customers, and across geography. For example, enabling customers to purchase directly via the web and specific to PTC and its customers PLM tools like Windchill enabled a global team of distributed engineers to collaborate
We are now at the beginning stages of the third wave of IT Evolution, as IT and connectivity is being embedded into the products themselves. Smart, connected products transform value creation by products also impact activities across the value chain such as product design, marketing, sales and service.
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4. Smart, Connected Product Components
Product Cloud
Database, Application Platform,
Rules / Analytics Engine, Smart Product Applications
Connectivity One to One, One to Many, Many to Many
Smart Product
Enhanced UI
Ability to Interact
Software
Ability to Instruct
Smart, connected products have three core elements: physical components, “smart” components and connectivity components. Smart components amplify the capabilities and value of the physical components and connectivity amplifies the capabilities and value of the smart components, and enables some of the smart components to exist outside the physical product itself. The result is a virtuous cycle of innovation.
Physical components are comprised of the product’s mechanical and electrical parts. In a car, for example, these include the engine block, tires, and batteries.
“Smart” components are comprised of the electronics, controls, sensors, software and, typically, an embedded operating system and often an enhanced user interface. In a car, for example, smart components include the engine control unit (ECU), anti-lock braking system, rain-sensing windshields with automated windshield wipers, and touch screen displays. In many products, software replaces some hardware components, or enables a single physical device to perform at a variety of levels. For example, the horsepower rating of some John Deere tractor engines can be changed using software alone.
Connectivity components are comprised of the elements enabling wired or wireless connections. Connectivity takes three forms, which can be present together: one-to-one; one-to-many; or many-to-many. Connectivity serves a dual purpose. First, it allows information to be exchanged between the product and its operating environment, its maker, and its users, and other products and systems.
Second, connectivity enables some functions of the product to exist outside the physical device, in what is known as the product cloud. For example, in Bose’s new Wi-Fi music system the music source is not in the device but streamed from the Internet and controlled by a smartphone application.
Sensors
Ability to Sense
Electronics and Controls
Ability to Process
Physical Product
Electrical
Mechanical
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5. Smart, Connected Product Technology Stack
PRODUCT CLOUD
Identity & Security
Tools that manage user authentication and system access, as well as secure the product, connectivity, and product cloud layers
External Information Sources
A gateway for information from external sources – such as weather, traffic, commodity and energy prices, social media, and geo-mapping – that informs product capabilities
Integration with Business Systems
Tools that integrate data from smart, connected products with core enterprise business systems such as ERP, CRM, and PLM
Smart Product Applications
Software Applications running on remote servers that manage the monitoring, control, optimization, and autonomous operation of product functions
Rules/Analytics Engine
The rules, business logic, and big data analytical capabilities that populate algorithms involved in product operation and reveal new product insights
Application Platform
An application development and execution environment enabling the rapid creation of smart, connected business applications using data access, visualization, and run-time tools
Product Data Database
A big data database system that enables aggregation, normalization, and management of real-time and historical product data
COMMUNICATIONS
Network Communication
The protocols that enable communications between the product and the cloud
Smart, connected products require companies to build and support an entirely new technology infrastructure. This “technology stack” is made up of multiple layers, including new product hardware, embedded software, connectivity, a product cloud consisting of software running on remote servers, a suite of security tools, a gateway for external information sources, and integration with enterprise business systems.
Smart, connected products require that companies build an entirely new technology infrastructure, consisting of a series of layers known as a “technology stack” (see the exhibit “The New Technology Stack”). This includes modified hardware, software applications, and an operating system embedded in the product itself; network communications to support connectivity; and a product cloud (software running on the manufacturer’s or a third-party server) containing the product-data database, a platform for building software applications, a rules engine and analytics platform, and smart product applications that are not embedded in the product. Cutting across all the layers is an identity and security structure, a gateway for accessing external data, and tools that connect the data from smart, connected products to other business systems (for example, ERP and CRM systems).
This technology enables not only rapid product application development and operation but the collection, analysis, and sharing of the potentially huge amounts of longitudinal data generated inside and outside the products that has never been available before. Building and supporting the technology stack for smart, connected products requires substantial investment and a range of new skills—such as software development, systems engineering, data analytics, and online security expertise—that are rarely found in manufacturing companies.
PRODUCT
Product Hardware
Embedded sensors, processors, and a connectivity port/antenna that supplement traditional mechanical and electrical components
Product Software
An embedded operating system, onboard software applications, an enhanced user interface, and product control components
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6. Smart, Connected Product Capabilities
Smart, connected products enable new categories of capabilities, with each building on the preceding one
4. Autonomy
3. Optimization
2. Control
1. Monitoring
Smart, connected products enable new categories of capabilities, with each building on the preceding one
Monitor: First new capability, Monitor. Used to need physical proximity to determine condition. Now, can determine condition / environment / operation remotely.
Biotronik pacemaker. Connectivity allows physician to remotely monitor patient’s heart condition. Biotronik now positioned to move to selling home health monitoring as a service.
Control: Second new capability is control. Like monitor, we used to need proximity for control. Now, remote control of both configuration and operation.
Example: Doorbot – remote doorbell. Visitor rings doorbell, sends an alert to smartphone or tablet. Camera allows you to see and hear the visitor. Unlock door remotely. Pretty useful!
More powerful would be remote control fleets of machines. Factory floor. Excavators in mine shaft. Pumps and valves on oil rigs off shore.
Optimize: Third new capability, we can optimize. Optimize performance during operation. Optimize Uptime.
Reconfigure elevators in tall office buildings by dynamically dividing into long hauls / short hauls to optimize flow of people at different times of day. Every elevator doesn’t have to stop at every floor, which is what tends to happen if you don’t optimize.
Example: Tractors and equipment. Range of horsepower options. Same mechanical engine. Software.
Example: Remote diagnostics and service. Automated software upgrades. Suspend operation to help prevent failure.
Autonomy: Fourth new capability is autonomy. Consider many sources of input. Sophisticated algorithms and self-learning. Analyzes product performance and environment. Reacts to conditions in real-time.
Example: BIOswimmer from Boston Engineering. Fishbot = Autonomous Underwater Vehicle. Mimics tuna shape and motion to stay on course despite ocean waves and currents. Used to map terrain, perform search and rescue.
Autonomous products act alone, or coordination with each other. Some day smart factories where smart, connected machines produce other smart, connected products.
Sensors and external data sources monitor the product condition, environment, and operation, and alert/notify of changes
Software embedded in the product or in the product cloud controls product operation and personalizes the user experience
Monitoring and control capabilities enable algorithms that optimize product performance and perform diagnostic, service, and repair
Combining monitoring, control, and optimization allows autonomous product operation, service, and coordination with other product systems
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7. Charting the Impact on Competition
How do smart, connected products affect the structure of the industry and industry boundaries?
How do smart, connected products affect the configuration of the value chain and the set of activities required to compete?
What new types of strategic choices will smart, connected products require companies to make to achieve competitive advantage?
Critical Impacts to INDUSTRY STRUCTURE
Transforms VALUE CHAINS
Raises a New Set of STRATEGIC CHOICES
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8. Strategic Positioning: Ten Key Strategic Choices
Which smart, connected product capabilities and features should the company pursue?
Considerations:
First, it must decide which features will deliver real value to customers relative to their cost
Example - In residential water heaters, A.O. Smith has developed capabilities for fault monitoring and notification, but water heaters are so long-lived and reliable that few households are willing to pay enough for these features to justify their current cost. Consequently, A.O. Smith offers them as options on only a few models. In commercial water heaters and boilers, however, adoption of such capabilities is high and rising. The value of remote monitoring and operation to commercial customers that often cannot operate without heat and hot water is high relative to their cost, and so these features are becoming standard. Note that the cost of incorporating smart, connected product features will tend to fall over time, as is the case in water heaters and boilers. When deciding what features to offer, then, companies must continually revisit the value equation.
Second, the value of features or capabilities will vary by market segment, and so the selection of features a company offers will depend on what segments it chooses to serve
Schneider Electric, for example, makes building products as well as integrated building management solutions that gather volumes of data about energy consumption and other building performance metrics. For one segment of customers, Schneider’s solution involves remote equipment monitoring, alerts, and advisory services in reducing energy use and other costs. For the segment of customers that want a fully outsourced solution, however, Schneider actually takes over remote control of equipment to minimize energy consumption on customers’ behalf.
Third, a company should incorporate those capabilities and features that reinforce its competitive positioning. A company competing with a high-end strategy can often reinforce differentiation through extensive features, while a low-cost competitor may choose to include only the most basic features that affect core product performance and that lower the cost of operation. For example, A.O. Smith’s Lochinvar boiler unit, which competes using a highly differentiated strategy, has made extensive
smart, connected product features standard on its core products. In contrast, Rolex, the luxury watchmaker, has decided that smart, connected capabilities are not an area in which it will compete.
Focused Capabilities
Wider Capabilities
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9. Strategic Positioning: Ten Key Strategic Choices
How much functionality should be embedded in the product versus the cloud?
Considerations:
Once a company has decided which capabilities to offer, it must decide whether the enabling technology for each feature should be embedded in the product (raising the cost of every product), delivered through the product cloud, or both. In addition to cost, a number of factors should be taken into consideration.
Response time. A feature that requires quick response times, such as a safety shutdown in a nuclear power plant, requires that the software be embedded in the physical product. This also reduces the risk that lost or degraded connectivity slows down response.
Automation. Products that are fully automated, such as antilock brakes, usually require that greater functionality be embedded into the device.
Network availability, reliability, and security. Embedding software in the product minimizes dependence on network availability and the amount of data that must flow from the product to cloud-based applications, lowering the risk that sensitive or confidential data will be compromised during transmission.
Location of product use. Companies that operate products in remote or hazardous locations can mitigate the associated dangers and costs by hosting functionality in the product cloud. As discussed above, Thermo Fisher’s chemical analyzers, used in hazardous or toxic environments, have cloud-based capabilities and connectivity that enable the instantaneous transmission of contamination data and allow the immediate initiation of mitigation efforts.
Nature of user interface. If the product’s user interface is complex and is changed frequently, the interface may be best located in the cloud. The cloud offers the ability to deliver a much richer user experience and potentially to take advantage of an existing, familiar, and robust user interface like a smartphone.
Frequency of service or product upgrades. Cloud-based applications and interfaces allow companies to make product changes and upgrades easily and automatically.
Example:
Home audio equipment illustrates these tradeoffs, and how different choices reflect different strategies. SONOS, a smart, connected products pioneer, set out to “reinvent home audio for the digital age,” placing a premium on convenience and ease of use. The company’s wireless systems place both the music source and the user interface in the cloud, enabling SONOS to simplify its products’ physical design, combining the amplifier and speaker in a portable device controlled from a smartphone. SONOS attempted to disrupt the home audio market, seeking competitive advantage by streamlining and simplifying the user experience. The tradeoff? Consumers need a Wi-Fi enabled home, and wireless packaged audio systems do not deliver the sound quality of wired and separate components that true audiophiles demand. Competitors such as Bose will make different choices and tradeoffs to secure their competitive advantage.
Sound Quality Focus
Cloud-Driven Innovation
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10. Strategic Positioning: Ten Key Strategic Choices
Should the company pursue an open or closed system?
Considerations
Closed systems create competitive advantage by allowing a company to control and optimize the design of all parts of the system relative to one another. The company maintains control over technology and data as well as the direction of development of the product and the product cloud. Producers of system components are restricted from accessing a closed system or are required to license the right to integrate their products into it. A closed approach may result in one manufacturer’s system becoming the de facto industry standard, enabling this company to capture the maximum value.
A closed approach requires significant investment and works best when a single manufacturer has a dominant position in the industry that can be leveraged to control the supply of all parts of the smart, connected product system. If either Philips Healthcare or GE Healthcare were the dominant manufacturer of medical imaging equipment, for example, it could drive a closed approach in which it could sell medical imaging management systems that included only its own or partners’ equipment to hospitals. However, neither company has the clout to restrict hospitals’ choice of other manufacturers’ equipment, so both companies’ imaging system platforms interface with other manufacturers’ machines.
A fully open system enables any entity to participate in and interface with the system. When Philips Lighting introduced the hue smart, connected lightbulb, for example, it included a basic smartphone application that allowed users to control the color and intensity of individual bulbs. Philips also published the application programming interface, which led independent software developers to quickly release dozens of applications that extended the utility of the hue bulbs, boosting sales. The open approach enables a faster rate of applications development and system innovation as multiple entities contribute. It can also result in a de facto industry standard, but one from which no company gains a proprietary benefit.
While a closed system is possible for individual product systems, it is often impractical for systems of systems. Whirlpool, for example, realizes that its strong position in home appliances will not be sufficient to become the leader in the “connected home,” which includes not only connected appliances but also automated lighting, HVAC, entertainment, and security. Therefore, Whirlpool designs its appliances to be readily connectable to the variety of home automation systems on the market, seeking to retain proprietary control only over its product features. A hybrid approach, in which a subset of functionality is open but the company controls access to full capabilities, occurs in industries like medical devices, where manufacturers support an industry standard interface but offer greater functionality only to customers. Over time, closed approaches become more challenging as technology spreads and customers resist limits on choice.
Example:
For example, sysmex has chosen a closed-system approach in developing their hematology analyzers. This choice has enabled increased sales of their complimentary products, as the system is optimized when used with other products within the system.
When Philips Lighting introduced the hue smart, connected light bulb, for example, it included a basic smartphone application that allowed users to control the color and intensity of individual bulbs. Philips also published the application programming interface, which led independent software developers to quickly release dozens of applications that extended the utility of the hue bulbs, boosting sales. The open approach enables a faster rate of applications development and system innovation as multiple entities contribute. It can also result in a de facto industry standard, but one from which no company gains a proprietary benefit.
Closed System
Open System
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11. Strategic Positioning: Ten Key Strategic Choices
Should the company develop the full set of smart, connected products capabilities and infrastructure internally, or outsource to vendors and partners?
Considerations:
Companies that develop smart, connected products in-house internalize key skills and infrastructure and retain greater control over features, functionality, and product data. They may also capture first-mover advantages and the ability to influence the direction of technology development. The company gets on its own, steeper learning curve, which can help maintain its competitive advantage. For example, while software skills are not well developed in most manufacturing companies, Jeff Immelt recently said that “every industrial company will become a software company.” The nature of technology for smart, connected products makes it clear why that might well be true and why building internal software capability is crucial.
Early pioneers AGCO and Deere have both taken a largely in-house route to develop smart farm equipment solutions for those reasons. GE has created a major software development center to build in-house capabilities it sees as strategic across business units.
However, as with the two previous IT waves, the difficulty, skills, time, and cost involved in building the entire technology stack for smart, connected products is formidable and leads to specialization at each layer. Just as Intel has specialized in microprocessors and Oracle in databases, new firms that specialize in components of the smart, connected products technology stack are already emerging, and their technology investments are amortized over many thousands of customers. Early movers that choose in-house development can overestimate their ability to stay ahead and end up slowing down their development time line.
But outsourcing can create new costs, as suppliers and partners demand a larger share of the value created. Companies that rely on partners also compromise their ability to differentiate going forward, and their ability to build and retain the in-house expertise required to set overall product design strategy, manage innovation, and choose vendors well.
In making these build-versus-buy choices, companies should identify those technology layers that offer the greatest opportunities for product insight, future innovation, and competitive advantage, and outsource those that will become commoditized or advance too quickly. For example, most companies should strive to maintain solid internal capabilities in areas such as device design, the user interface, systems engineering, data analytics, and rapid product application development.
Examples:
By developing smart, connected products with in-house talent, companies internalize key skills and infrastructure while potentially gaining greater control over features, functionality, and available product data.  Where requisite technology is not available from third parties, firms may gain a first-mover advantage and retain greater control over the direction of technology development and improvement.  The company gets on its own, steeper learning curve, which can help to maintain its competitive advantage.  As early pioneers, AGCO and Deere have both taken a largely in-house route to develop smart farm equipment solutions for these reasons. 
Kept Audi example here – No example specified in article…
Audi has chosen to create an extensive partner network in the creation of their on-board infotainment system.
Internal Development
Partner Outsourcing
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12. Strategic Positioning: Ten Key Strategic Choices
What data does the company need to capture, secure and analyze to maximize the value of its offering?
Considerations:
Product data is fundamental to value creation and competitive advantage in smart, connected products. But collecting data requires sensors, which add cost to the product, as does transmitting, storing, securing, and analyzing this data. Companies may also need to obtain rights to the data, adding complexity and cost. To determine which types of data provide sufficient value relative to cost, the firm must consider questions such as: How does each type of data create tangible value for functionality? For efficiency in the value chain? Will the data help the company understand and improve how the broader product system is performing over time? How often does the data need to be collected to optimize its usefulness, and how long should it be retained?
Companies must also consider the product integrity, security, or privacy risks for each type of data and the associated cost. The less sensitive data a company collects, the lower the risk of breaches and transmission disruptions. When security requirements are high, companies will need capabilities to protect the data and limit transmission risk by storing data in the product itself. (We will discuss security more extensively in part two of this series.)
The types of data a company chooses to collect and analyze also depend on its positioning. If the company’s strategy is focused on leading in product performance or minimizing service cost, it must usually capture extensive “immediate value” data that can be leveraged in real time. This is especially important for complex, expensive products for which downtime is costly, such as wind turbines or jet engines.
For companies seeking leadership in the product system, there is a need to invest in capturing and analyzing more-extensive data across multiple products and the external environment, even for products the company does not produce. For example a smart, connected product system might need to capture traffic data, weather conditions, and fuel prices at different locations for an entire fleet of vehicles.
Different strategies involve different data-capture choices. Nest, which aims to lead in energy efficiency and energy cost, gathers extensive data on both product usage and peak demand across the energy grid. This has enabled the Rush Hour Rewards program, which raises residential customers’ air conditioning thermostat temperature to reduce energy use during peak demand periods and precools a home before peak demand begins. By partnering with energy providers, securing the data they provide, and integrating it with customer data, Nest enables customers to earn discounts or credits from their energy provider and to use less energy when everyone else is using more.
Examples:
The types of data collected and analyzed will depend on the company’s positioning. If the company’s strategy is focused on leadership in product performance or minimizing the cost of after sale service, it may capture extensive “immediate-value” data that can be leveraged in real time. This is especially true in complex, high value products in which downtime is costly , such as a critical defense system, a wind turbine, or a jet engine.
Nest, by aiming to lead in energy efficiency and cost, gathers data on both product usage and peak demands across the energy grid. This has enabled the Rush Hour Rewards program which raises residential customers’ air-conditioning thermostat temperature during peak demands and/or pre-cools a home before peak demand begins. By partnering with energy providers, securing data they provide and integrating it with customer data, Nest enables its customers to earn discounts or credits from their energy provider by using less energy when everyone else is using more. Elekta’s radiation therapy equipment collects equipment performance information as well as patient care information. The Radiation Oncology Data Alliance  is an initiative by Elekta Software to create the foundation for the first radiation oncology specific data registry. It aims improve data quality and quality of care in the radiation oncology community. Through the RODA, Elekta Software has developed and deployed an infrastructure that supports, among other programs, the ability to retrospectively identify treatment practices and correlate them with patient outcomes.
Radiation Therapy Equipment
Consumer Thermostat
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13. Strategic Positioning: Ten Key Strategic Choices
How does the company manage ownership and access rights to the data it seeks and collects?
Considerations: As a company chooses which data to gather and analyze, it must determine how to secure rights to the data and manage data access. The key is who actually owns the data. The manufacturer may own the product, but product usage data potentially belongs to the customer.
There is a range of options for establishing data rights for smart, connected products. Companies may pursue outright ownership of product data, or seek joint ownership. There are also various levels of usage rights, including NDAs, the right to share the data, or the right to sell it. Firms must determine their approach to transparency in data collection and use. Rights to data can be laid out in an explicit agreement or buried in small print or hard-to-understand boilerplate documents.
Another option for handling data rights and access includes the establishment of a data-sharing framework with component suppliers for providing information about the component’s condition and performance but not about its location. Limiting suppliers’ access to data, however, could reduce potential benefits if the supplier lacks a full understanding of how products are being used, slowing innovation.
Customers and users want a say in these choices. Some customers today are much more willing than others to share data on their product use
Careful stewardship of data will also be essential, especially in highly regulated industries such as medical devices
Customers will want a say in these choices, and customer interest in data about their product use will only grow. Some customers may be more willing than others to share data on their product use. For example, part of FitBit’s value proposition for many customers lies in its ability to share via social media the personal fitness information it collects But not every customer wants to share this data.
In highly regulated industries, such as medical devices, careful stewardship of data is at a premium, and regulatory standards for access and security are often already in place and will be extended. Biotronik has created infrastructure that allows it to securely gather patient information, such as arrhythmia events or pacemaker battery status, and share it only with a specified audience – the patient’s physician
All-in-One Health Monitor
Pacemaker
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14. Strategic Positioning: Ten Key Strategic Choices
Should the company fully or partially disintermediate distribution channels or service networks?
Considerations: Smart, connected products enable firms to maintain direct and deep customer relationships, which can reduce the need for distribution channel partners. Companies can also diagnose product performance problems and failures and sometimes make repairs remotely, reducing reliance on service partners. By minimizing the role of the middlemen, companies can potentially capture new revenue and boost margins. They can also improve their knowledge of customer needs, strengthen brand awareness, and boost loyalty by educating customers more directly about product value.
While disintermediation has definite advantages, some level of physical proximity to customers is still required and desirable in most industries. Customers must take delivery of and sometimes install a physical product, and some types of service visits are still necessary. In addition, customers may have strong relationships with resellers and channels that offer them a broader product line and deep and local field-based expertise. When manufacturers diminish the role of valuable channel partners, they risk losing them to competitors whose strategy is to embrace partners. Also, assuming roles formerly handled by partners—such as direct selling or service—can be challenging, involving high start-up costs and major new investments in value chain functions such as sales, logistics, inventory, and infrastructure.
The choice of whether or not to disintermediate a channel or service partner will depend in large part on the type of partner network the firm manages. Do partners simply distribute products, or are they critical to delivering training and service in the field? What percentage of partner activities can be replaced through smart, connected product capabilities? Do customers understand the value of eliminating the middleman? Do customers understand that traditional relationships with established channels are no longer necessary and involve extra cost?
Tesla, for example, has disrupted the channel “status quo” in the automotive industry, selling its cars directly to consumers and servicing them itself rather than via a traditional dealer network. This has simplified the firm’s pricing, as consumers pay full sticker price and avoid haggling at the dealership, greatly improving customer satisfaction. By eliminated third party involvement in repairs, Tesla also captures revenue and deepens its relationship with customers. The firm proactively transmits software upgrades to its cars, constantly improving the customer experience. Think of this as the electronic version of that new car smell with each new software update. When a Tesla vehicle is due for repairs, it either independently calls for a remote repair via software or, if needed, for a valet to pick it up and deliver it to the Tesla facility. The firm was recently rated number one in customer satisfaction by Consumer Reports.
As opposed to the traditional automotive dealership system by selling directly to customers.
While the advantages of disintermediation are appealing, some level of physical proximity is still required in most industries. Customers must take delivery of and sometimes install a physical product, and some service visits will usually still be necessary. In addition, customers may have strong existing relationships with resellers and channels, and such channels may offer the advantages of supporting a broader product line, as well as deep and local field-based expertise. Manufacturers also risk losing channel partners whose role is diminished to competitors, especially if competitors have strategies that embrace them.
Traditional Dealership
Direct to Customer
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15. Strategic Positioning: Ten Key Strategic Choices
Should the company change its business model?
Considerations: Smart, connected products allow the radical alteration of this long-standing business model. The manufacturer, through access to product data and the ability to anticipate, reduce, and repair failures, has an unprecedented ability to affect product performance and optimize service. This opens up a spectrum of new business models for capturing value, from a version of the traditional ownership model where the customer benefits from the new service efficiencies to the product-as-a-service model in which the manufacturer retains ownership and takes full responsibility for the costs of product operation and service in return for an ongoing charge
Smart, connected products create a dilemma for manufacturers, particularly those that make complex, long-lived products for which parts and service generate significant revenue and often disproportionate profit. Whirlpool, for example, currently has a healthy business selling spare parts and service contracts—a model that can dull incentives to make products more reliable, more durable, and easier to fix.
The profitability of product-as-a-service models depends on the pricing and terms of contracts, which are a function of bargaining power. Product-as-a-service models can increase buyers’ power, because customers may be able to switch after the contract period (if the product is not embedded as with an elevator), unlike with perpetual ownership.
Hubway is an example of a “pure play” product-as-a-service company. That company sells the use of its bikes which are available through a connected network of stands in and around Boston. This gives traditional bike makers reason to consider their own business models. Would they be better off, in terms of customer satisfaction, revenue, and profits if they delivered their own bikes to market via a shared service model? They may produce fewer total units, but they would ensure higher utilization rates for each unit sold which could increase per-unit revenue.
Another Option:
Smart, connected products create a dilemma for manufacturers, particularly those that make complex long-lived products with high costs of parts, maintenance, and service. Here, service generates significant revenues and often disproportionate profit. Take the example of Whirlpool, whose customers bear the cost of operation. Whirlpool currently has a healthy business selling spare parts and service contracts, which conflicts with making its products more reliable, durable, and easier to fix. If, instead, the customer simply paid Whirlpool for the use of the machine, the economic incentives are turned upside down. But Whirlpool could see profits go down.
Transactional Sales Model
Product-as-a-Service
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16. Strategic Positioning: Ten Key Strategic Choices
Should the company enter new businesses by monetizing its product data by selling it to outside parties?
Considerations: Companies may find that the data they accumulate from smart, connected products is valuable to entities besides traditional customers. Companies may also discover that they can capture additional data, beyond what they need to optimize product value, that is valuable to other entities. In either case, this may lead to new services or even new businesses.
Data about the performance of a product’s components, for example, could be valuable to suppliers of those components. Data about driving conditions or delays gathered by a fleet of vehicles could be valuable to other drivers, to the operators of logistical systems, or to road repair crews. Data about driving characteristics could be valuable to fleet operators or insurance companies
Again, in choosing how to capture new value from product data, companies must consider the likely reaction of core customers. While some of them may not care how their data is used, others may feel strongly about data privacy and reuse. Companies will need to identify mechanisms to provide valuable data to third parties without alienating customers. For example, a company might not sell individual customer data but rather blinded or aggregate data on purchasing patterns, driving habits, or energy usage.
Data about the performance of a product’s components, for example, could be valuable to the component supplier. Data about driving conditions or delays, gathered by a fleet of vehicles can be valuable for other drivers, operators of logistical systems, or road repair crews. Data about driving characteristics could be valuable to fleet operators or insurance companies.
Previous Examples Used:
For example, Tivo used to sell set top boxes for recording tv shows and now they know enough about customer activity that they have progressed to selling real-time data about what their users are watching to advertisers.
GE on the other hand, sells a platform, Predix, as opposed to data. Customers utilize the GE developed platform to monitor machine operation and performance.
Selling User Data to Advertisers
Data Proprietary to GE
Confidential and Proprietary - Not for Distribution

17. Strategic Positioning: Ten Key Strategic Choices
Should the company expand its scope?
Considerations: The emergence of product systems and systems of systems raises at least two types of strategic choices about company scope. The first is whether a company should expand into related products or other parts of the system of systems. The second is whether a company should seek to provide the platform that connects the related products and information, even if it does not make or control all the parts.
Companies may be tempted to enter into related products in order to capture the big opportunity, but entry into related products always involves risk and the need for new capabilities. Companies must identify a clear value proposition before entering. Expanding product scope will be most attractive where there are major performance improvement opportunities through co-designing the related products to optimize the system. Alternatively, if optimization is not dependent on individual product designs, a company may be better off sticking to its knitting and providing open connectivity to related products produced by others. Success is less a function of traditional product design than systems engineering.
Companies whose products (and associated technological capabilities) are central to overall product system operation and performance, such as Joy Global’s mining machines, will be in the best position to enter related products and integrate the system. Manufacturers that produce less system-critical machines, such as the trucks that move the material extracted from underground, will have less capability and credibility in customers’ eyes to take on a broader system provider role.
The choice of whether or not to develop the technology platform that connects a product system or system of systems depends on some related questions. The first is whether the company can assemble the necessary IT skills and technology, which are quite different from those required in product design and manufacturing. Another key question is where system optimization takes place. “Inside product” optimization involves integrating individual product designs so that products work better together. “Outside product” optimization takes place through the algorithms that connect products and other information, where products themselves are modular. Inside product optimization creates the strongest rationale for expanding into related products and offering a proprietary platform. Outside product optimization favors an open platform, and the platform may be offered by a company that does not produce products at all.
Finally, as smart, connected products expand industry scope and the boundaries of competition, many companies will need to rethink their corporate purpose. The focus is shifting to the broader need companies meet, rather than their traditional product definition
Another question is where system optimization will take place, either inside or outside individual products. For example, Carrier has more than 100 years of innovation in the design and optimization of a full range of HVAC equipment such as furnaces, air conditioners, heat pumps, humidifiers, and ventilators. The firm’s smart Infinity heating and cooling system brings this family of equipment together into a connected product system, optimized for HVAC performance. However, some end customers may desire that the Infinity system plug into a broader home automation system, and Carrier must provide interfaces to allow its product family to become optimized at the system of systems level.
As smart, connected products expand industry scope and the boundaries of competition, companies may need to rethink their corporate purpose, focusing on the broader need they meet rather than their traditional product definition. Carrier Corporation offers an example of these choices. It has a 100-year history of innovation in the design of a full range of HVAC equipment such as furnaces, air conditioners, heat pumps, humidifiers, and ventilators. Carrier optimizes its HVAC product system performance by integrating individual designs across products, and its smart Infinity heating and cooling system platform connects them. However, HVAC is part of a broader home automation system. Carrier has not entered other product areas within home automation because of the need for very different capabilities. Rather, its Infinity platform provides interfaces to allow the HVAC product family to be integrated into the system of systems
For example, Trane has moved from seeing itself as a HVAC equipment producer to a company that makes high performance buildings better for everyone inside.
Product System Optimized to Work Together
System of Systems
Confidential and Proprietary - Not for Distribution

18. Smart, Connected Products Journey
Example: Evolution of Farm Equipment Industry
SMART, CONNECTED
PRODUCT
PHYSICAL PRODUCT
SMART
PRODUCT
PRODUCT SYSTEM
SYSTEM OF SYSTEMS
Product is comprised of physical (i.e., mechanical, electrical) and other material components
Product incorporates software, sensors, electronics and controls, and an enhanced user interface
Product incorporates wired or wireless connectivity to exchange data remotely and
enable new capabilities outside the physical product
Smart, Connected Product integrates into a product system, usually within the same industry, to optimize product and system performance
Smart, Connected Product is coordinated across other products systems, outside traditional partners, suppliers, and industry, to optimize product and system performance + +
Tillers
Planters
Tractors
Farm Equipment System
Combine Harvester
Weather System
Irrigation System
Seed Optimization System
Farm Equipment System
Farm Management System Platform
So how did we get here?
In this example, we follow the expansion from the farm tractor industry where the manufacturer is responsible for the performance of the Product, to the Product System where you're tying together the farm tractor, tiller, and harvester products together to optimize the performance of the planting and harvesting, to the System of Systems where you're getting weather data feeds, working with the seed companies, commodity future, and all of a sudden the seed companies, commodities traders, etc. become part of the industry.
Now I think there's been a tendency in the popular press to jump all the way from, the Product to the System of Systems, but much of the value can be captured by the smart, connected product.
Confidential and Proprietary - Not for Distribution